Real Life Case Studies – Income Replacement Plans

Real Life Case Studies – Income Replacement Plans

In this issue, I will be exploring the various types of Income Protection policies as well as the principles applied when deciding on insured values. Policies falling under this category comprises of:-

  1. Critical Illness (CI)
  2. Personal Accident (PA)
  3. Hospital Income (HI)
  4. Life

When you purchase any of the policies above, you’re simply buying time on how long you can stay away from active work while nursing from an unfortunate covered event.

Critical Illness Plan

When taking CI plans, I usually suggest taking the equivalent of 3 years of gross income rather than take home pay, as it’s a better representation of the insured’s true economic value.

Often, I’m asked why 3 years? Why not lower or even higher? The 3 years benchmark is based on my experience in the field of financial advisory. When a covered event occurs, money is often the difference between life and death.

Let’s say the insured person is diagnosed with cancer, which happens to be one of the 36 covered events in a CI policy. In reality, the first 12 to 18 months will likely be riddled with multiple trips to the hospital.

Should the insured respond favourably to the treatment given, the insured will likely be given medical leave for the next 12-18 months to recuperate. Economically, the insured has lost 3 years of income earning ability.

No employer, despite their generosity, will be able to keep a sick employee on their payroll for 36 months on full salary. If they do, then that would be an exceptional firm to work with!

Based on this rationale and medical statistics, the 3 year benchmark is applied. Should one’s budget allow, take bigger income multiples. However, insured values that are lesser than the recommended values should be topped up at the next immediate opportunity to do so.

Personal Accident Plans

The common approach is to buy a pre-packaged policy that has a certain sum assured on Death and matching the premium with one’s budget.

However, statistically, the probability of Death/Permanent Disability/Dismemberment is less than 10% in the event of an accident. One is 9 times more likely to sustain an injury and survive the ordeal.

Therefore, the proper way of planning is to focus on Living Benefit rather than Death. Should an accident occur and you are on an extended medical leave without pay, at least a monthly benefit from the insurer to take care of compulsory expenses such as house instalments, utility bills and living expenses will be feasible.

Hospital Income Plan

Its purpose is to compensate policy owners with daily income benefit in the event of hospitalisation due to illness or an accident. But, pre/post hospitalisation medical leave is not covered.

It is a plan that I rarely give to individuals who are on regular employment with fixed salaries since their pay is not reduced due to medical absenteeism. It is more suited for those who are paid daily such as part-time waiters, construction workers and etc. By having a HI plan, this loss is mitigated for each day that the policy owner is absent from work.

Life Policies

Life policies are plans that pay when the insured’s life has been taken away due to natural causes (includes sickness and old age), accidentally (includes murder) and in some cases, even suicide.

The rationale is to provide the dependents with financial assistance for the income lost due to the insured’s passing. In practice, I usually suggest a coverage amounting to 10 years of annual income.

The logic for this figure is based on the theory that most people are able to come to terms with the loss of a loved one by that time period. It also gives the insured a psychological relief that the family would have sufficient time to re-organise their lives and move on.


The above suggestions are merely a guideline rather than an exact science. There is no hard and fast rule to apply when designing a plan. At the end of the day, it is something that helps the insured to sleep well at night knowing that he/she has done what is practically possible in discharging one’s responsibilities.

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